HBI is a consumer goods company with the portfolio of leading apparel brands such as Hanes, Champion, Playtex, Bali, etc. The company designs, manufactures, sources and sells a broad range of basic apparel such as T-shirts, bras, panties, men’s underwear, socks and so on. The operating business can be divided into five operating segments: innerwear, outerwear, hosiery, direct to consumer and international. The products are sold in multiple distribution channels. As of fiscal year 2010, mass merchants accounted for 44% of total net revenue, 20% for retail channel, 15% for national chains and department stores in the US, 12% for the international segment and 9% for the direct-to-consumer segment in the U.S.
The majority of its products, 88%, were sold in the U.S. And domestically, 81% of total sales were wholesale to retailers, 10% direct to consumers and 9% were wholesales to wholesalers. The largest customers were Walmart, Target and Kohl's, each respectively accounting for 26%, 17%, 6% of the total net sales in 2010. As any retailer business, it was subjected to seasonality; sales were normally higher in the last two quarters from July to December.
Judging from its past 10-year performance, the business seems to be declining, as the top line fluctuated in a decreasing trend at $4-$5 billion. Operating cash flow and free cash flow over time followed a similar trend. The good thing to note is the positive profitability over the past 10 years, and the double-digit return on equity in 8 out of 10 historical years.
HBI can be considered the top player in most innerwear and basic apparel in North America. During the last few years, the firm has moved most of its manufacturing from the U.S. to Central America to Asia, consolidating more than 130 facilities to 54 locations. The executives believed strongly in the cost savings of $150 million from 2010 to 2012, benefiting from the purchasing synergies and efficiencies in manufacturing and distribution.
In terms of the financial health, HBI was highly leveraged, with D/A of more than 80% of total assets, including long-term debt of nearly 50%. In the asset structure, HBI has more than a $1.7 billion value in inventories in the total assets valued at $4.2 billion. This is a red flag for any retailer. Let's see the components in HBI’s inventories.
The increase in the raw materials might be an indicator of an increase in production in the near future, but I do not like to see an increase in finished goods. It might be reasonable to see the accumulation of inventories before the holiday for the fourth quarters, but if the reporting figures show an increase in inventories in the first quarter of 2012, then investors should get worried.
HBI is owned by six gurus, and three of them have been selling their positions out.
Currently, the market values HBI at 8.6x earnings — nearly three times the book and 15.3x cash flow. Investors might get excited for the single digit earning multiple, but with the high debt burden that the company is carrying, combined with the decreasing trend over the 10-year history, the stock needs to get much, much cheaper before I can get interested in initiating a position.
This is the subjective viewpoint of the author, and it is not the recommendation to buy, hold or sell the stocks mentioned in this analysis. Anyone who wishes to buy, hold or sell the stocks has to do his/her own analysis at his/her own risk.
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